CASRIP Newsletter - Summer 1999, Volume 6, Issue 1
Recent Legislative Updates in Japan
by Toshiko Takenaka
The Japanese Industrial Property system has recently undergone kaleidoscopic changes, many of which are very significant. In the last two years, the JPO has introduced fundamental revisions into the patent, design, and trademark laws that completely restructure the principles controlling many aspects of the conditions and scope of Japanese industrial property protection. Although this Newsletter has previously published short reports of the 1998 Patent Law Revision and Design Registration Law Revision, this Article is a more detailed analysis covering all major changes in Japanese industrial property system introduced by the JPO in last two years.
1998 Patent Law Revision
(1) Easy Access to Lost Profits Damages
After finishing its review of patent-granting procedures and the liability phase of enforcement the JPO entered the final stage of its review of the Japanese patent system under its new pro-patent policy. This final stage was a review of patentees' remedies for patent infringement, and culminated in late 1998 with a revision of the patent law provisions relating to calculation of damages.1 Damages awarded by Japanese courts have been criticized by U.S. patent owners because they are much smaller than those awarded by U.S. courts. Patent owners constantly lose money when suing infringers in Japanese courts. Aside from the criticisms from U.S. patent owners, some Japanese patent owners, who have become accustomed to U.S. style awards, came to view current Japanese damage awards as insufficient to compensate for their loss. These Japanese owners preferred to sue infringers in U.S. courts.
The 1998 revision, which became effective on January 1, 1999, amended Article 102, the statute defining the calculation of patent infringement. The revised Article 102 expressly provided, for the first time, the option of lost profits as a measurement of patent infringement damages.2 The new provision for lost profits was inserted in Paragraph 1, and the existing provisions regarding defendant's profits and reasonable royalty were moved to Paragraphs 2 and 3 respectively. The insertion of the new provision in the first paragraph may be interpreted as announcing a change of policy in the measurement of damages from infringement of Japanese patents.
The new paragraph 1 significantly increases a patentee's chances of recovering damages in the form of lost profits. Courts may interpret the new provision as creating a positive test for claiming lost profits, effectively removing the heavy burden of proof to establish causation. Interpreted literally, the new provision requires a patentee to show only two factors: (1) the patentee's capability to manufacture and sell, and (2) its own profits and the number of infringing products. The burden then shifts to the infringer to demonstrate that the number of infringing products ought to be reduced.
The new paragraph shows the strong influence of U.S. case law. Two factors listed in the provisions are two of four factors under the Panduit test developed by U.S. courts to infer causation between infringement acts and damages.3 Because the new provision does not require a showing of no acceptable substitutes, previously the most effective defense for U.S. infringers under the Panduit test, recovery of damages in the form of lost profits is now easier than in U.S. courts.
The defense of acceptable substitutes had functioned even stronger in Japanese courts than in U.S. courts because it negated causation and completely prevented a recovery of lost profits. Knowing the dreadful effect of the defense, the JPO intentionally removed the factor from the new provision and lowered the barrier to recovery of lost profits.4 The JPO intended the negative factors developed under the pre-1998 law, including the presence of acceptable substitutes, will function only to reduce the amount determined in accordance with the first sentence of the provision.5 Courts are expected to reduce the amount established by the patentee only when infringers can produce evidence that is sufficient to show the presence of a substitute or any special circumstance that would have prevented patentees from making sales even without the infringement.6
Because the JPO has extensively published in detail their deliberations of the new provision, the courts may choose to follow the JPO's view of the legislation. A recent Japanese court decision, SmithKline v. Fujimoto,7 has already shown the impact of JPO's analysis of the provision on the case law. Although the case was decided before the effective date of the new provision,8 the SmithKline court's lost-profits analysis closely followed the JPO's legislative intent in using the new provision. The court found that the evidence as to net profits and volume of infringing sales was sufficient to show causation, and awarded lost profits equal to the amount which would result from calculation in accordance with the new provision.
(2) Increased Reasonable Royalty Damages
The 1998 Revision was designed to increase the amount of damages in the form of reasonable royalty by removing the term "normally" from the provision, and defining the recovery of the amount of money which the patentee would be entitled through a license to a third party.9 In the past, Japanese courts granted an amount equal to legally licensed royalty rates by referencing the published industry-standard royalty rates and rates for licensing government owned patents. The courts previously believed that such rates reflect the amount normally paid for a license.10 The removal of "normally" enables courts to grant an amount much higher than the amount normally paid for a license to deter future infringement.11
Interestingly, corrections comparable to those adjustments made to increase patent infringement damages were introduced into provisions for calculating infringement damages not only in design law but also in trademark law. This is interesting in view of the fact that U.S. case law influencing the 1998 revision did not apply to calculation of trademark infringement damages. Considering that U.S. courts calculate trademark infringement damages in a manner closer to the old Japanese case law, Japanese trademark infringement damages are now likely to be substantially greater than U.S. awards.
1999 Patent Law Revision
(1) Changes in Granting Procedure
The 1999 Patent Law Revision moved to further align Japanese patent-granting procedure with the European Patent Office's procedure by introducing absolute novelty12 and reducing the period in which to file a request for examination to three years from the application date.13 JPO explains that the shorter period for request of examination would reduce the pending period of application in Japanese Patent Office and contribute to the goal of giving quick protection. However, industry indicated concerns about the difficulty of evaluating the commercial value of pioneer or basic inventions in such a short period. Thus, the revised law adopted 3 years, instead of 2 years as under the EPC, to give applicants sufficient time to evaluate the commercial value and scope of the invention.
Another measure to aid speedy protection is early laid-open publication by request of the applicant.14 Under the old system, laid-open publication was automatic after 18 months from the application date, but the newer system allows earlier laid-open publication if the applicant files a request. Because laid-open publication creates the right to request compensation from a party who exploits without authorization,15 the new system enables an applicant, upon issuance of its patent, to seek compensation for unauthorized exploitation of its invention during any period after the laid-open publication. The applicant is first required to send formal notice of the claimed invention to the unauthorized exploiter, who becomes liable for compensation for the period after receipt of notice.
(2) Procedural Improvements
In pursuit of the goal of giving stronger protection, the 1999 Revision clarified major procedural changes introduced to patent litigation by the new Code of Civil Procedure. 16 Under the old laws Japanese judges were already able to use many of the procedural measures introduced by the new Code of Civil Procedure and the 1999 Patent Law Revision by using their own discretion to administer litigation proceedings.17 However, these revisions have formalized these judicial practices, and have encouraged parties to cooperate to take evidence.
First, the revision introduced the duty of an accused infringer to cooperate with the patentee to identify the act alleged to infringe the patent-in-suit.18 The newly introduced provision requires an accused infringer to produce, as evidence, its own product or process when it rejects the accused product or process produced by the patentee. This provision effectively shifts the burden of production from the patentee to the defendant once the patentee produces what it is believes to be the accused product or process. However, the accused infringer is excused from the duty to produce its product or process if there is a proper reason to refuse.
Second, just as the new Japanese Code Civil Procedure has expanded parties' duty to produce evidence in general,19 the 1999 Revision has also expanded patent litigation parties' duty to produce not only documents necessary to calculate damages, but also documents necessary to establish liability for infringement.20 However, the new Code of Civil Procedure excuses the party from the duty if the evidence involves information that falls into certain categories, including trade secrets and proprietary information.21 Evidence used to identify the accused act and product as well as to show lost profits resulting from the infringement often includes proprietary trade secrets, e.g., detailed manufacturing schematics, raw cost data, and supply sources. If asserting the presence of trade secrets in requested document automatically excused the duty, the courts' power to request documents will become meaningless.
The new Code of Civil Procedure adopted an in camera procedure to examine whether the requested evidence in fact includes information that falls within the listed categories.22 Because the in camera proceeding requires disclosure of disputed evidence only to judges, the requested party can protect proprietary information. At the same time, the requesting party is also protected from improper use of the trade secret defense to the request to produce evidence.
The 1999 Revision adopted similar language to enable courts to use in camera proceedings in patent litigation. However, the patent law provision gives discretion broader than that granted by the Code of Civil Procedure. The Revision simply provides that a court can request a refusing party to produce a document in order to determine if there is a proper excuse to refuse the request of production.23 According to the report published by JPO, the presence of trade secret information does not automatically justify the refusal by the accused infringer.24 The court would determine whether the reason for refusal is appropriate by balancing the necessity of the evidence in the proceeding against the importance of protecting the proprietary information.
Third, the 1999 Revision introduced an accounting expert witness system for calculating damages.25 Although the current Patent Law enables patentees to request production of evidence necessary to calculate damages, parties often cannot effectively use such evidence without the assistance of accounting specialists. The new Article 105 enables the court to appoint an accounting expert to calculate damages based on the submitted evidence. Further, the new provision imposes on the parties the duty to clarify the meaning of information entered as evidence to calculate damages when requested by the appointed expert. However, according to the report, the JPO expects under the Revision that the types of experts expected to be appointed to calculate damages will be accountants. The system introduced by the Revision will not include economic experts, who are often introduced by parties in U.S. patent litigation for the calculation of damages.26
Fourth, the 1999 Revision added a provision to enable courts to determine the amount of damages based on the facts established by the patentee on a case-by-case basis. Damages may be awarded even if the patentee cannot show the scope of damages caused by infringement to the degree required by the Code of Civil Procedure, as long as the patentee shows the presence of damages.27 This provision was introduced to reduce the patentee's burden of proof imposed by the Code of Civil Procedure, which requires a high degree of certainty to establish the presence or absence of a fact, including causation. Japanese cases clearly indicate the serious difficulty in persuading courts to find causation between infringement and what the patentee would have made but for the infringement when a patentee claims damages in the form of lost profits.28 In the past, when evidence was found to be insufficient to show the scope of damages, courts completely denied a recovery of lost profits even if the evidence was sufficient to show the presence of damages.
The new Code of Civil Procedure enables courts to assess the amount of award when they determine the presence of damages but the nature of such damages makes the assessment of the amount difficult.29 Patentees should be able to use this provision as patent litigation generally follows the rules of civil procedure. However, the JPO was concerned that courts might not apply this provision to patent infringement damages.30 To clarify the change, the new patent law repeats verbatim the provision in the Code of Civil Procedure, specifically stating that it applies in patent litigation.31
In addition to these procedural improvements with respect to proceedings in Japanese courts, the 1999 Revision altered the hantei proceeding, a trial proceeding in which the JPO is called to interpret a disputed claim.32 This revision is aimed at reducing courts' workloads by shifting responsibility for claim interpretation, findings of literal infringement and determinations of infringement under the doctrine of equivalents.33 Although the conclusion of infringement does not bind courts, and is similar to an expert opinion, a quick decision by a hantei trial is expected to expedite dispute resolution including settlements. The Revision is expected to increase the JPO's ability to take and examine evidence.34 The Revision includes a provision that authorizes courts to make effective use of JPO's infringement determination proceedings.35 Under the new provision, the JPO commissioner appoints three examiners to process the determination.
Finally, in addition to the increased criminal sanctions introduced in the 1998 Revision, the 1999 Revision raised the ceiling on fines for offenses of fraud and false marking from 3,000,000 yen to 100,000,000 yen.36
The procedural changes facilitating a showing of damages and increasing criminal sanctions are also incorporated in revised design and trademark laws.
Design Registration Law
The 1998 Revision of the Design Registration Law was introduced to raise the standard of creativity for Japanese design registration and to accommodate complex needs to protect the different aspects of industrial design involved in new products.
First, the 1998 Revision altered the definition of subject matter protected under Article 2, and expressly provided that a part of an article (buppin) also constitutes a registration-eligible design.37 Further, the revision removed a limitation on a combination of articles, which are filed and protected as one design. The old law, in principle, required applicants to file for a design with respect to each article, and allowed filing of a design for a combination of articles only if the combination fell within the categories listed in the JPO's rule. Under the new law, a design for a combination of articles can be filed and protected as long as the articles are customarily used together and represent a uniform design.38 The combination is examined as a whole with respect to the ability to register, but the design may be registered even if each article in the combination fails to meet the registerability requirement.
In contrast to this expansion of subject matter, the revision excludes from protection designs that are not suitable for an exclusive right. Reflecting case law developments in the United States and European countries, the 1998 Law expressly excludes from protection a design consisting only of structures necessary to provide the function of an article.39
Second, the 1998 Revision expanded the power to reject a design for lack of creativity based on the prior art.40 Under the old law, only designs that were "widely known" in Japan were considered prior art. In contrast, the new law only requires designs to be "publicly known" in any country to constitute the prior art.41 At the same time, the 1998 Revision removes a design claimed in an early application from the prior art (prior right) if the design was abandoned or withdrawn without publication. This enables a later applicant to obtain a registration on the same design as long as the design has not been published. If the design has been published, it constitutes the prior art giving rise to lack of novelty and creativity.
Finally, the 1998 Revision abolished the similar-design registration system.42 The old similar-design registration system enabled the same applicant to file for minor variations (qualified for novelty but not qualified for lack of creativity under the regular registration system) of a design claimed in the earlier application.43 The registration obtained by the similar-design registration system depended on the registration from the earlier application.44 The 1998 Revision replaced this system with the related-design registration system, which enables the applicant to obtain registrations for minor variations only if the applications for the variations are all filed on the same day.45 However, the registrations for the variations through the related-design registration system will still depend on each other. These related registrations will not be able to be transferred separately46 and all registration expires when the first registration expires 15 years from its registration date.47
1999 Trademark Revision
The 1999 Trademark Revision introduced a drastic change to the Japanese trademark system. This change resulted from an attempt to prepare Japan for joining the Madrid Protocol.48 Previously, the JPO has been very reluctant to join the Madrid Protocol because of the expectation that major legislative changes would be necessary. The JPO was particularly concerned about the difficulty of completing trademark examinations within 18 months.49 However, the need of domestic industry to reduce international trademark prosecution costs finally moved the JPO to make changes. Since 1997, the Japanese trademark system has gone through a series of revisions to move closer to the Madrid Protocol's model of less administration and quicker protection. The 1999 Revision finally made the Japanese trademark system ready for full compliance. The new system is expected to become effective as of January 1, 2000, although there may be a delay because of the difficulty in revising all the regulations and rules implementing the major changes.
The most serious hurdle facing the JPO in adhering to the Madrid Protocol is the requirement that trademark holders be given protection after the application date that is comparable to the right given to them after registration.50 Under the current system, a trademark filed for application is not entitled to any protection before registration. There is a significant difference between the right obtained in the period after application and before registration and the exclusive right given after registration. The JPO resisted the idea of giving immediate protection without examination because such protection might unfairly limit competitors' rights, if the trademark was used without knowledge of the application for the mark.
The solution adopted by the JPO was a combination of an early-publication system51 and a right of compensation.52 This combination gives notice to competitors through early publication, while securing a right of compensation to applicants against a third party's unauthorized use of a filed trademark. Under the new early-publication system, the JPO publishes the content of an application as soon as possible after the application is filed.53 The right of compensation enables trademark owners to recover monetary compensation for damages resulting from unauthorized use of the mark during the period between the application date (not the publication date) and the registration date. To obtain this right, trademark owners must send to the competitor a formal warning notice accompanied with a copy of the early publication. The right is not enforceable unless and until the mark is registered. Japanese courts will very likely require use of the mark to recover an amount of damages, although the language of the new provision does not expressly provide for it. A trademark usually has no commercial value without an actual adoption and use.
Another serious attempt by JPO to move the Japanese trademark system closer to the Madrid Protocol was to require that examiners issue a First Official Action within a definite time period.54 Although the provision gives authority to JPO to set the period, it is expected that JPO will set the period to eighteen months from the application date to meet the requirement of the Madrid Protocol.
Finally, the 1999 Revision includes various provisions for implementing the process of filing an international trademark application through the JPO.55 All provisions reflect the Madrid Protocol's requirements for a granting procedure processed by the Office of a Contracting Country.
In the past few years, all branches and aspects of the Japanese Industrial Property Law have undergone a series of major revisions. Such changes removed many of the features that were unique to the Japanese system. Laws and rules implementing the revisions have changed so quickly and frequently that Japanese IP professionals and academics face serious difficulty in keeping abreast. Also, the increased number of disputes brought to Japanese courts has resulted in significant changes in case law interpreting statutes that had not been altered by the revisions. It seems almost impossible for those who are outside of Japan to stay current because the JPO is very behind in preparing and publishing English materials on these legislative changes. Furthermore, only a very few institutions regularly publish English translations of Japanese court decisions.
In general, these revisions all redound mainly to the benefit of industrial property owners because they aim to secure a quick and strong protection. The traditional balance under Japanese industrial property policy has shifted significantly away from the interest of competitors and the public to the interests of IP owners. This shift reflects both the change in view of Japanese industry, and the trend widely adopted among Japan's important trade partners, namely the United States and Europe.
1. Law to Partially Revise the Patent Law and Other Industrial Property Laws, Law No. 51 of 1998 [hereinafter, 1998 Revision].
2. 1998 Revised Patent Law, Article 102, Paragraph 1 reads:
Where a patentee or exclusive licensee claims a recovery of damages from a person who willfully or negligently infringes its patent right or exclusive license, and said person has assigned products which constitute infringement to a third party, said patentee or exclusive licensee may claim to recover damages equal to the amount of profits per unit of goods that would have been sold but for the infringement multiplied by the number of said assigned goods (hereinafter, "number assigned"), as long as the amount does not exceed the ability of said patentee or exclusive licensee to exploit the patented invention. However, where circumstances indicate that said patentee or exclusive licensee would have been unable to sell all or some of said assigned goods, courts should deduct the unsold number from the number assigned. (Translation by the author).
3. Panduit Corp. v. Stahlin Bros. Fibre Works, Inc., 575 F.2d 1152, 197 U.S.P.Q. 726 (6th Cir. 1978).
4. Yasukazu Irino, Tokkyo Hou Tou no Ichibu wo Kaisei suru Houritsu (A Law for Revising Part of Patent Law and Other Industrial Property Laws), Juristo No. 1140, 71 (1998).
7. SmithKline & Beecham French Laboratories Ltd. v. Fujimoto Seiyaku, Judgment of Oct. 12, 1998 (unreported), summarized in 5-3 CASRIP Newsletter 7 (Center for Advanced Study and Research in Intellectual Property, University of Washington School of Law, Seattle, Autumn 1998), available on-line at <www.law.washington.edu/~casrip/newsletter/newsv5i3jp1.html;.
8. The new provision took effect on January 1, 1999.
9. 1998 Revised Patent Law, Article 102, Par. 4.
10. For a general discussion of Japanese damages prior to the 1998 Patent Law Revision, see Institute of Intellectual Property, Chiteki Zaisanken Shingai ni kakaru Minjiteki Kyuusai no Tekiseika ni Kansuru Chousa Kenkyuu (Study of Appropriate Civil Remedies for Compensating Intellectual Property Damages) [hereinafter, IIP Damages Report] 33 (March, 1996). For a report in English on Japanese patent infringement damages, see Toru Toyama, Study with Respect to Proper Civil Remedies for Infringements of Intellectual Property, 1996 IIP Bulletin 62 (1996).
11. Irino, supra note 19.
12. Law to Partially Revise the Patent Law and Other Intellectual Property Laws, Law No. 41 of 1999 [hereinafter, 1999 Re vision], Article 29 (February 1999). The revision will remove the geographical limitation that is currently imposed on non-documentary prior art, namely public knowledge and public use. The revision also clarified that the information made public through the Internet constitutes documentary prior art, and distributed publication.
13. 1999 Revised Patent Law, Article 48 ter.
14. 1999 Revised Patent Law, 64 bis.
15. 1999 Revised Patent Law, Article 65, par. 5.
16. For a general discussion of improvements introduced by to patent litigation by the new Code of Civil Procedure, see Ryu Takabayashi, Practices of Patent Litigation in Japanese Courts, 5-2 CASRIP Newsletter 13 (Center for Advanced Study and Research in Intellectual Property, University of Washington School of Law, Seattle, Spring-Summer 1998), available on-line at <www.law.washington.edu/~casrip/newsletter/newsv5i2jp2.html.
17. Comments by Professor Ryu Takabayashi, a former patent court judge, from a telephone interview with the author on June 10, 1999.
18. 1999 Revised Patent Law, Article 104 bis.
19. Code of Civil Procedure, Law No. 109 of 1997 [hereinafter, New Code of Civil Procedure], Article 219, par. 4.
20. 1999 Revised Patent Law, Article 105, Par. 1.
21. New Code of Civil Procedure, Article 220, par. 4(b).
22. New Code Civil Procedure, Article 223, par. 3.
23. 1999 Revised Patent Law, Article 105, par. 2.
24. Industrial Property Committee, Planning Sub-Committee in Japanese Patent Office, Toward Further Enhancement of Pro-Patent Policy (Puro Patento Seisaku no Issouno Shinka ni Mukete) [hereunder, 1998 IPC Report] 35 (Nov. 1998).
25. 1999 Revised Patent Law, Article 105 bis.
26. 1998 IPC Report, supra note 39, at 37.
27. 1999 Revised Patent Law, Article 105 ter.
28. 1998 IPC Report, supra note 39, at 40.
29. New Code of Civil Procedure, Article 248.
30. 1998 IPC Report, supra note 39, at 41.
31. 1999 Revised Patent Law, Article 105 ter.
32. 1999 Revised Patent Law, Article 71.
33. 1998 IPC Report, supra note 39, at 50.
34. 1999 Revised Patent Law, Article 71, pars. 3 and 4.
35. 1999 Revised Patent Law, Article 71, bis.
36. 1999 Revised Patent Law, Article 201.
37. 1998 Revised Design Law, Article 2, par. 1.
38. 1998 Revised Design Law, Article 8.
39. 1998 Revised Design Law, Article 5, par. 3.
40. 1998 Revised Design Law, Article 3, par. 2.
41. This revision broadens the scope of prior art both geographically and by reducing the publication threshold. The "publicly known" standard may be met by actual knowledge by only one person not in a confidential relationship with the designer.
42. 1998 Revised Design Law, Article 10.
43. Design Law, Law No. 125 of 1959 [hereinafter, 1959 Design Law], Article 10.
44. 1959 Design Law, Article 22. Article 49.
45. 1998 Revised Design Law, Article 10, par. 1 and 2.
46. 1998 Revised Design Law, Article 22.
47. 1998 Revised Design Law, Article 21.
48. Protocol Relating to the Madrid Agreement Concerning the International Registration of Marks (1989) [hereinafter, Madrid Protocol].
49. Madrid Protocol, Article 5.
50. Madrid Protocol, Article 3 and Article 4.
51. 1999 Revised Trademark Law, Article 12 bis.
52. 1999 Revised Trademark Law, Article 13 bis.
53. In practice, this will take one to two months.
54. 1999 Revised Trademark Law, Article 16.
55. 1999 Revised Trademark Law, Article 68 bis, seq. (Ch. 7 bis).